What’s a Hedge Fund?

Hedge funds are alternative investments that you can choose in case you’re looking for more ways to diversify. Hedge funds use pooled funds with numerous different strategies using Online Trading Forex Review to earn active return for you. Let’s break it down further.

Key Characteristics

Hedge funds may be managed aggressively, or, if you like, they can use derivatives and leverage in domestic and international markets. Of course your goal is to generate higher returns.

Only Open To “Accredited” Investors

Hedge funds can only serve “accredited” or qualified investors. And who are these qualified ones? These are investors with an annual income above $200, 000 for the past couple of years, or a net worth that reaches $1 million, not including their primary residence. This is because of the investor needs to be capable of handling potential risks from wider investment mandate.

Wider Investment Latitude

Hedge funds move in an investment space is only limited by its mandate. These can basically invest in anything. You name it—land, real estate, stocks, derivatives, and currencies—they have it. Hedge funds are unlike mutual funds, which stick to stocks or bonds.

Employ Leverage

Hedge funds often use margins and leverages to increase returns, with the consequence of amplifying damages too. Just to remind you, the financial crisis of 2008 proved that leverage can wipe out hedge funds,

Fee Structure

Hedge funds do not only charge an expense ratio, they also charge performance fees. It’s called “two and twenty”: 2 percent goes to the asset management fee, and then there will be a 20 percent cut of any gains generated.

Here are some risks that you should be aware if you plan to invest in hedge funds:

They have concentrated investment strategy, so they’re also exposed to potentially big losses.

You might be required to lock up your money for long periods.

Because of leverage, minor losses might be translated to substantial ones.

In Choosing Hedge Funds, Check …

Fund Size/Firm Size

The guideline for size can be a minimum or a maximum, and this depends on your preference. Some investors often invest large amounts, and this causes firms to have a minimum size to accommodate a large investment.

Track Record

If you require the funds to have a minimum track record of 24 to 36 months, this one will remove all the new hedge funds from your options. However, some fund managers leave to start a new fund, and that means you can track his performance for a much longer time period.

Minimum Investment

This should be very important for you since some funds have minimums that can make it difficult to diversify. Larger minimums may mean a higher number of institutional investors, while low ones may mean a higher number of individual investors.

Redemption terms

This one’s for liquidity and it becomes very important when an overall portfolio is highly illiquid. When the lock up period is longer, it is much more difficult to incorporate into your portfolio. When the redemption periods are longer than a month, you may meet some challenges during your portfolio-management process.

Final Word

Investing in hedge funds can be tricky for beginners, and there are a lot of other guidelines you have to pore over. Nonetheless, if you have the firepower, this type of fund can help you more than adequately to gain better returns.